4.4.3—Nominal vs real GDP growth

Nominal GDP is valued at current prices, whereas real GDP removes the effect of changing prices by valuing output at constant prices or using a GDP deflator.

The distinction matters whenever inflation is present. A base year gives a common price structure for a time series; the exact index method can differ, but the purpose is the same—separate quantity change from price change.

If nominal GDP rises 8% while the general price level rises about 5%, real output has grown by roughly 3% rather than 8% (the exact result depends on the index calculation).

Nominal GDP is not “wrong”; it is the current-money measure. It becomes misleading only when it is treated as a direct measure of real production or living standards.